Contributed by:

Ajay Kumar Sanganeria, Partner, Head of Tax, KPMG in Singapore

Tan Chee Wei, Partner, Head of Consumer & Retail, Tax, KPMG in Singapore

The maxim ‘opportunities in a crisis’ has often been used in the context of the pandemic. It might be applied to Singapore’s Budget 2021, albeit with one small twist: The Budget will also need to address opportunities beyond the immediate crisis.

As the fallout from the pandemic continues to reverberate around the world, Budget 2021 can lay the groundwork for Singapore’s long-term success in the post-crisis world. This will require the cultivation of a transformational ecosystem—one that will not only accelerate Singapore’s ascent as a Smart Nation, but also cement its position as a global hub for supply chains and green finance.

A truly holistic approach will be needed to set Singapore on course to emerge stronger from the steepest recession in its history. The year 2021 has started on a brighter note, with the economy projected to grow by 5.5 per cent¹ . If vaccines successfully contain the pandemic, then the pace of growth can be even faster. The Budget should give impetus to this fledgling recovery, by providing continued support to businesses and workers.

While Singapore faces pressure on its fiscal expenditure, there will be opportunities to forge new growth pathways and capabilities. The government has injected about S$100 billion into the economy to soften the blow from COVID-19 and will need to build on its initiatives going forward.

Singapore is uniquely placed to reach for a bold vision for its future. KPMG in Singapore proposes a 3R framework to enable the country to re-imagine its economy, to re-plan its strategies to thrive in a constantly evolving business landscape and to re-create Singapore as a city-state of infinite possibilities.

Lower customer spending and manpower constraints in the wake of the pandemic have squeezed cash flows for enterprises. To support enterprise resilience, the government will need to place more cash in the hands of enterprises while ensuring cash outflow is minimised in the short- to medium-term.

The government can enhance the Group Relief (GR) scheme to allow businesses to utilise prior years’ unabsorbed capital allowances, trade losses and donations, as the existing scheme limits the utilization to current year items. By offsetting tax losses from previous years against future profits, cash outflow in taxes will be minimised when Groups start to record profits as the economy picks up, thereby bolstering enterprise resilience and survival.

It can also provide further assistance to ailing businesses by easing loss carry back rules. There should be no restrictions on the quantum of losses carried back or on the number of years for which losses are carried back, as the current rules impose a cap and a 3 year look-back period.

Companies should also be incentivised to hire personnel who lost their jobs following the virus outbreak, with corporate income tax rebates of 15 per cent, capped at S$100,000, for hiring a certain percentage of such workers.

To support start-ups in innovative businesses, which may reward founding members and key employees with equity awards, the Budget can defer payments of tax on the otherwise taxable gains when those shares are vested, or options exercised during the initial years.

The government could consider relaxing permanent establishment rules to allow Singapore tax resident individuals to work in the country for overseas employers, in order to gain the relevant experience. In addition, special tax rebates for local professionals in qualifying industries that are critical in revitalising Singapore’s economy should also be considered.

COVID-19 has upended global supply chains. The incubation and adoption of micro supply chain models can help Singapore mitigate risks from such disruptions. This can be achieved through supporting a ‘Connected Enterprise’ model, which enables businesses to align their front, middle, and back offices in order to operate an effective and efficient supply chain function.

The government can consider allowing writing down allowances on costs incurred on a broader range of intangible assets, which are critical to the operation of supply chain and trading principles. It can also grant 300 per cent tax deductions for costs incurred by Singapore companies for new Enterprise Resource Planning (ERP) systems or upgrading existing ones.

This Budget provides the opportunity to introduce a ‘Factory of the Future’ incentive to anchor advanced manufacturing or pilot plants. This should help support the revival of these capex-heavy industries which tend to incur losses in the early years of business. Enhanced (100 per cent) investment allowances, as well as more widely available grants to invest in pilot and Industry 4.0 automation plants, could be included in this package.

Technology has helped the world remain connected in the new reality of lockdowns and social distancing. While technology and innovation will remain key growth engines, the rapid proliferation of technology poses challenges for policy makers. The government will need to strike a delicate balance between regulation and innovation, while creating an enabling environment for technology adoption.

The rollout of 5G will be a key driver for data consumption and stimulate demand for innovation. Government support is needed to drive faster 5G development and adoption. In addition to the S$30 million fund announced recently by IMDA to help businesses test and adopt 5G solutions, tax depreciation for spectrum rights payments can partly offset costs to telcos.

Given Singapore’s limited natural resources and declining population, productivity is a more potent driver of economic growth than job creation. Digital technologies enhance productivity while driving cost efficiencies. Therefore, the rapid adoption of digital technologies is crucial.

A ‘Digital Transformation Package’ consisting of tax benefits has the potential to catalyse technology adoption. This should include higher capital allowances or tax deductions of up to 300 per cent for investment in digital technology and training.

The government should also encourage setting up green-based industries, while prioritising food security and positioning the nation as a centre for asset management.

Against the backdrop of the pandemic that has taken a heavy toll on the global economy and trade, this Budget will likely be one of the most pivotal in Singapore’s history, in terms of shaping the country’s re-emergence and also transforming the nation into a guiding light for the new reality of a digitally borderless world.